If you are looking to invest in Friedman Industries Incorporated’s (AMEX:FRD), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. Every stock in the market is exposed to market risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few. This is measured by its beta. Not all stocks are expose to the same level of market risk, and the market as a whole represents a beta of one. A stock with a beta greater than one is considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.
What is FRD’s market risk?
With a five-year beta of 0.48, Friedman Industries appears to be a less volatile company compared to the rest of the market. This means that the change in FRD's value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. Based on this beta value, FRD appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Does FRD's size and industry impact the expected beta?
With a market cap of USD $43.04M, FRD falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, FRD’s industry, metals and mining, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap FRD but a low beta for the metals and mining industry. This is an interesting conclusion, since both FRD’s size and industry indicates the stock should have a higher beta than it currently has. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Can FRD's asset-composition point to a higher beta?
An asset-heavy company tends to have a higher beta because the risk associated with running fixed assets during a downturn is highly expensive. I test FRD’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given a fixed to total assets ratio of over 30%, FRD seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. Thus, we can expect FRD to be more volatile in the face of market movements, relative to its peers of similar size but with a lower proportion of fixed assets on their books. This outcome contradicts FRD’s current beta value which indicates a below-average volatility.
What this means for you:
Are you a shareholder? You could benefit from lower risk during times of economic decline by holding onto FRD. Take into account your portfolio sensitivity to the market before you invest in the stock, as well as where we are in the current economic cycle. Depending on the composition of your portfolio, FRD may be a valuable stock to hold onto in order to cushion the impact of a downturn.
Are you a potential investor? Before you buy FRD, you should look at the stock in conjunction with their current portfolio holdings. FRD may be a great cushion during times of economic downturns due to its low beta. However, its high fixed cost may mean margins are squeezed if demand is low. I recommend taking into account its fundamentals as well before leaping into the investment.
Beta is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Friedman Industries for a more in-depth analysis of the stock to help you make a well-informed investment decision. But if you are not interested in Friedman Industries anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.